China’s Auto Sector: Slowing, But Still Attractive

By George Leong, B.Comm. Published : March 16, 2011

The key in China will be the rapid growth of the country’s middle class. In a recent research finding, Credit Suisse predicted that the household wealth in China will double to $35.0 trillion by around 2015 based on achieving sustainable GDP growth at or near the current growth rate.

The economic analysis is simple. The extra Renminbi means more cash to spend on non-essential goods and services. This includes furniture, real estate, vehicles, and travel.

I have been a big supporter of the Chinese auto sector.

You don’t have to tell General Motors Company (NYSE/GM) to go to China and look for growth opportunities. In fact, you don’t have to tell anyone.

Going out and buying GM would not be my best stock advice, but that is not to say that there are not other opportunities to play the Chinese auto market.

The world’s automakers know that, to grow, you need a presence in China’s auto sector, whether in it’s a venture with a Chinese company or as a standalone manufacturer of vehicles. The auto sector in China remains strong, as the country is the world’s largest auto market, with an estimated 16.5 million vehicles sold in 2010, according to the Chinese Industry Association.

Sales are showing some signs of slowing early in 2011. In the January-February period, vehicle sales were 10% year-over-year to 3.15 million vehicles in China, down from 84% growth a year earlier. While this is a concern, the absolute sales growth in China is still staggering.

General Motors, a rising player in China, reported a 34% year-over-year rise in its February sales to 184,498 vehicles. While good, this was well below the record 268,071 sold in January. GM and its Chinese partners sold 2.35 million vehicles in 2010, well above its U.S. sales.

Yes, there is clearly some slowing in the Chinese auto market, but I view dips as opportunities to buy for those with a longer-term view.

Given that only about 41 in 1,000 Chinese own vehicles, according to some industry pundits, there is clearly ample room for growth, especially as the income levels continue to rise. This fact will drive vehicle sales going forward to the point where China will likely remain the top auto market in the world.

The area of expensive or luxury vehicles is booming in China. The middle class is growing at a staggering pace, with more millionaires being created. When consumers find wealth, a big-ticket item they buy is a vehicle. The richer they become, the more they spend on vehicles. The sale of luxury cars is surging in China, according to auto industry researcher J.D. Power and Associates. The rate is well above what we are seeing in other industrialized countries.

There are numerous ways to play the Chinese auto sector. You can buy an auto company with exposure to China, such as the major global automakers.